Non-Convertible Debentures

Uploaded by : DreamGains Financials, Posted on : 07 Sep 2016

A Debenture is a type of Debt Instrument which offers a fixed rate of interest for a specified tenure. Companies or governments use debentures to borrow money. Debentures are simply loans taken by the companies and do not provide the ownership in the company.

Non-Convertible Debentures is a financial instrument issued by Corporates for specified tenure to raise resources/ funds through public issue or private placement. Interest can be earned monthly/ Quarterly/Annually/ Cumulative and on maturity principal amount is paid to the debenture holder.

Non-Convertible debentures are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they usually carry higher interest rates than their convertible counter parts.

A NCD can be both secured as well as unsecured. For secured debentures, which are backed by assets, in case the issuer is not able to fulfill its obligation, the assets are liquidated to repay the investors holding the debentures.

Companies seeking to raise money through NCD’s have to get their issue rated by agencies such as CRISIL, ICRA, CARE and Fitch Ratings. NCD’s with higher ratings are safer as this means the issuer has the ability to service its debt on time and carries lower default risk.

In India NCD’s shall not be issued for maturities of less than 90 days from the date of issue and NCD’s may be issued in denominations with minimum of Rs. 5 lakh (face value) and in multiples of Rs. 1 lakh.

Unlike Bank FD’s or Corporate FD’s, there is no tax deducted at source (TDS) on NCD’s offered in DEMAT mode and listed on a stock exchange as per section 193 of the IT Act. This however does not mean the investor does not need to pay any tax on the interest earned. Income tax on the interest income will have to paid at the time of declaring ones income.